Interest Rates: Fed leaves rate unchanged in November; tighter financial conditions make December increase unlikely
The Fed opted not to increase the benchmark fed funds rate at its November meeting amidst tightening economic conditions. A below-forecast October jobs report makes a December increase even more unlikely, according to Kiran Kini, CoBank's senior vice president and treasurer.
“The markets are pricing in less than a 5 percent chance of a rate hike by year end, which makes sense given what we are hearing from the Fed as well as the weakening data trend,” Kini said. “Given the significant move we’ve seen in long-term interest rates, the communication from the Fed over recent weeks has been consistent. Tightening of financial conditions resulting from higher interest rates is more than making up for any need to hike.
“There are estimates from market participants and from the Fed that say the tightening in financial conditions has been the equivalent of two to three rate hikes,” he added.
Despite the expectations, Kini acknowledged continued sticky inflation and an extremely robust third quarter driven by strong consumer spending.
“It depends on which metrics you look at, but inflation continues to be sticky,” said Kini. “Headline inflation has come down, as has core inflation. But super core inflation that the Federal Reserve watches continues to remain sticky.
“We had an incredibly strong Q3, with growth coming in at around 5 percent,” he continued. “There were one-off factors which drove that, including events like the Barbie movie, the Oppenheimer movie and the Taylor Swift tour. It seems weird to say it, but all of that happening in a short period led to a significant boost in consumer spending, which we’re seeing in GDP.”
Still, Kini pointed to signs that consumers are being stretched.
“Credit card balances are increasing, and car loan defaults and credit card delinquencies are picking up as well,” he said. “We’re seeing the consumer starting to show cracks, and I think that gives the Fed reason to pause and to be concerned. If this trajectory plays out, it will likely dampen spending, which will bring inflation down.”
Lastly, Kini noted two other key economic statistics.
The U.S. economy added a below-forecast 150,000 jobs in October, and the unemployment rate rose to 3.9—from 3.8—percent. Also, the U.S. Treasury Department said it expected to borrow $776 billion in the fourth quarter, $76 billion less than its forecast in July, which brought some relief to the bond markets.